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The slope of an AS curve changes from nearly flat at its far left to nearly vertical at its far right. At the far left of the aggregate supply curve, the level of output in the economy is far below potential GDP    , which is defined as the quantity that an economy can produce by fully employing its existing levels of labor, physical capital, and technology, in the context of its existing market and legal institutions. At these relatively low levels of output, levels of unemployment are high, and many factories are running only part-time, or have closed their doors. In this situation, a relatively small increase in the prices of the outputs that businesses sell—while making the assumption of no rise in input prices—can encourage a considerable surge in the quantity of aggregate supply because so many workers and factories are ready to swing into production.

As the quantity produced increases, however, certain firms and industries will start running into limits: perhaps nearly all of the expert workers in a certain industry will have jobs or factories in certain geographic areas or industries will be running at full speed. In the intermediate area of the AS curve, a higher price level for outputs continues to encourage a greater quantity of output—but as the increasingly steep upward slope of the aggregate supply curve shows, the increase in quantity in response to a given rise in the price level will not be quite as large. (Read the following Clear It Up feature to learn why the AS curve crosses potential GDP.)

Why does as cross potential gdp?

The aggregate supply curve is typically drawn to cross the potential GDP line. This shape may seem puzzling: How can an economy produce at an output level which is higher than its “potential” or “full employment” GDP? The economic intuition here is that if prices for outputs were high enough, producers would make fanatical efforts to produce: all workers would be on double-overtime, all machines would run 24 hours a day, seven days a week. Such hyper-intense production would go beyond using potential labor and physical capital resources fully, to using them in a way that is not sustainable in the long term. Thus, it is indeed possible for production to sprint above potential GDP, but only in the short run.

At the far right, the aggregate supply curve becomes nearly vertical. At this quantity, higher prices for outputs cannot encourage additional output, because even if firms want to expand output, the inputs of labor and machinery in the economy are fully employed. In this example, the vertical line in the exhibit shows that potential GDP occurs at a total output of 9,500. When an economy is operating at its potential GDP, machines and factories are running at capacity, and the unemployment rate is relatively low—at the natural rate of unemployment. For this reason, potential GDP is sometimes also called full-employment GDP    .

The aggregate demand curve

Aggregate demand (AD) refers to the amount of total spending on domestic goods and services in an economy. (Strictly speaking, AD is what economists call total planned expenditure. This distinction will be further explained in the appendix The Expenditure-Output Model . For now, just think of aggregate demand as total spending.) It includes all four components of demand: consumption, investment, government spending, and net exports (exports minus imports). This demand is determined by a number of factors, but one of them is the price level—recall though, that the price level is an index number such as the GDP deflator that measures the average price of the things we buy. The aggregate demand (AD) curve    shows the total spending on domestic goods and services at each price level.

Questions & Answers

compare pakistan's economic conditions and development with other countries
Adnan Reply
1. Division of labour increases the quality of output 2. it brings about specializations where a worker has an advantage of his area of competence. 3. The pay you get help you to buy the goods and wants
Becky Reply
1. to make choice in the face of scarcity 2. specializations 3.division of labour
Human wants and needs are numerous but the resources available are limited in supply.
The maximum amount of ham the residents will consume in a month is 30000
it makes economic sense to her because she works to get paid. since she cannot produced vegetables,
A computer systems engineer only specialized in his field of study as a computer engineer not a painter. so he needs to get the service of a painter to paint his house and he will pay for the service of the painter
the kitchen will produce more meals because there is division of labour and area of expertise
division of labour without trade will not work because there is no training in a particular field
it also increase productivity
or increase productivity
how to print
Siti Reply
what is flow variable
Siyanda Reply
a flow is a quantity that can be measured over a specific period of time
is economics a social science or a pure science
Hilda Reply
social science
social science
social Science as a Subject and Pure science as a study
How to compute National income by using the expenditure approach
Bridget Reply
explain the method?
C+I+G+(X-M) C= Consumption Expenditure I= Investment Expenditure G= Government Expenditure X-M = Net Export
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What do you need? Maybe we can help
What's going on here?
l need some information about macroeconomic
First tell us what you already know about macroeconomic.
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yes !! am here !! Lecturer of Economics And Statistics
Macroeconomics is too vast,so please be specific your question
I need help in statistics my lecturer is too fast at times I dont understand
Briefly explain whether the discipline of economics is a social science or pure science( normative or positive)
Okafor Reply
answer.... Economics is social science
different between absolute advantage and comparative advantage
mathematical economics
masele Reply
show some questions under this topic
why met worth is added with libilitys in the balance sheet
bijoy Reply
what are the implications of inflation targeting?
Alinaitwe Reply
maximize profit
What happens to the goods and money market if the government cuts public spending?
Harman Reply
then the government will be punished by the public
GDP, INFLATION, UNEMPLOYMENT & PRODUCTIVITY and then write a paragraph on the behavior of each variable after analyzing them graphically.
what is international trade
Stella Reply
International trade is the exchange of capital, goods, and services across international borders.
international trade is the exchange of goods and services across boundaries
international trade is the exchange of goods and services of country and abroad
international is the process of exchanges of value interm of goods and services along national frontier
Increase knowdge and skill. it save time and cost. Increase high Efficiency of production .
betta Reply
List kinds of Elastcity of Demand

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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